Lessons from the Book 📚 The Intelligent Investor

Overview

When Warren Buffett, the renowned investor who is one of the richest men in the world, calls a book “by far the best book on investing ever written,” you know it’s got to be important.

The Intelligent Investor (2003 edition), first published in 1949, is still widely considered one of the best and most influential books on value investing. Benjamin Graham, who was a mentor to Buffett, outlines strategies that can turn a hit-or-miss gambler into an intelligent, informed investor who knows how to put value investing to successful use in the stock market.

Insights from Chapters 1-2

#1

The definition of an investment is clear: it’s an operation which, after careful analysis, promises safety of principal and adequate returns.

#2

There are three parts to the process of investing. First, before buying a stock, you must make a thorough analysis of a company and the soundness of its underlying businesses. Second, you need to protect yourself against serious losses. Third, you should aim for adequate performance, not extraordinary.

#3

Investing and speculating are vastly different. Investors calculate what stocks are worth, based on the value of their businesses, while speculators gamble whether a stock will go up or down in price based on whether others are going to pay more or less for it.

#4

By speculating instead of investing, you lower your own odds of building wealth and raising someone else’s. Just like gambling, it’s the worst imaginable way to build your wealth, because just like casinos, Wall Street has calibrated the odds so that the house prevails in the end.

#5

Conversely, investing is not quite a gamble, because you do it based on rules that put the odds squarely in your favor.

#6

If you wish to speculate, do so sensibly. Never put more than 10 percent of your wealth into speculation, and remain completely aware that this is just a gambling venture that may or may not give you returns.

#7

Inflation is the rate at which the prices of goods and services are rising. You should remember to measure your investment success not just by what you make, but by how much you keep after inflation.

#8

To guard against inflation, intelligent investors have three options. First, they can buy stocks at the right price. In 80 percent of five-year periods since 1926, stocks outpaced inflation. However, since they did not do so 20 percent of the time, buying stock is not an infallible safety method.

#9

The second method is to invest in bonds from Real Estate Investment Trusts, or REITS, which are companies that own and collect rent from commercial and residential properties, and Treasury Inflation-Protected Securities, or TIPS, which are US government bonds that automatically go up in value when inflation rises.

Insights from Chapters 3-4

#1

An intelligent investor must never forecast the future exclusively by assuming that existing trends will continue, or that similar methods used in the past will be applicable now. This exact mistake has caused the downfall of many pundits and investors.

#2

As most people took the high returns of the stock market in the late 1990s for granted, the world was shocked when in the following years, stocks crashed left and right.

#3

The idea that stocks have always returned 7 percent a year after inflation is based on historical stock market data. But that data is based on the past. The past is not necessarily a guide to the future.

#4

The value of any investment should always be a function of the price you pay for it. The profits that companies can earn are finite, therefore the price that investors should be willing to pay for stocks must also be finite.

#5

How aggressive you want your portfolio to be depends less on the investments you own and more on the kind of investor you consider yourself to be. You can be an active or passive investor.

#6

An active or aggressive investor continually researches, selects, and monitors a dynamic mix of stocks, bonds, or mutual funds. A passive or defensive investor creates a permanent portfolio that runs on autopilot and requires no further effort.

#7

The difference between the two is that the active route is intellectually demanding, as you need to constantly analyze and keep up with the market, which is exhausting but exciting.

#8

On the other hand, the passive route means you don’t have to worry about the market, but you have to keep yourself emotionally detached from it and miss out on the thrill of active investing.

#9

Both approaches can be equally successful; you just have to choose which suits you best.

#10

One of the good choices for defensive investing is bonds. Examples include US Savings Bonds, state or municipal bonds, corporation bonds, or others like annuities and Treasury securities.

Insights from Chapters 5-6

#1

The defensive investor must always defend against the belief that you can choose stocks without doing any research. When you buy only the stocks you are familiar with, you become likely to succumb to familiarity bias, and fail to make an informed decision on whether to buy or not.

#2

Countless stock buyers have made the same mistake by loading up on shares of a certain shop or website because they are loyal customers or users. Familiarity can breed complacency, and we stop questioning things, miss warning signs, and unknowingly head for avoidable losses.

#3

Luckily, because of the internet, investing is easier than ever before, and getting information on a stock can be done in a flash.

#4

For beginner investors, websites like Sharebuilder and FolioFN allow you to buy stocks in tiny increments whenever you like, so you can get started even if you are not wealthy or willing to pour in thousands of dollars at once.

#5

Keep in mind though that with such websites, you will need to make an exhaustive list of everything you purchase, for tax reasons. If you’re not up to the task, forego the venture.

#6

If you are an aggressive investor, stay away from high-yield bonds, or junk bonds, unless you are retired and can afford to lose some value in your investment. Similarly, don’t put more than 10 percent of your total bond portfolio into foreign bonds in developing countries.

#7

Day trading, or quickly buying and selling stocks, holding them for only a few hours at a time, is comparable to committing financial suicide. Some of your trades might make money, but most will lose money, and your broker will always be the one benefitting.

Insights from Chapters 7-8

#1

It’s easy, when you look back, to pinpoint exactly when you should have bought or sold a stock. But never let yourself be foolish enough to think you can spot those timings in real time with perfect accuracy.

#2

There’s a reason the past is the past and the present is the present. Knowing market timing is a practical and emotional impossibility, and any strategies that rely on it are bound to fail, unless you get very lucky.

#3

Most of the biggest fortunes made in America came from investors concentrating on one singular investment they knew well. This could be taken to mean that it’s better to put all your eggs into one basket rather than diversify your portfolio.

#4

However, the majority of small fortunes have not been made through a single investment, and the majority of big fortunes are not kept through that method either. So to be on the safe side, diversify.

#5

Common stocks are susceptible to severe fluctuations in their prices.

#6

You can profit from fluctuations either by emphasizing the timing of your stock trading, which is speculative, or focusing on the pricing, which means buying stocks at a price you deem below their value, after having analyzed and researched them. The pricing method is more in line with healthy investing.

#7

Investing is also morally superior to speculating, because it's not about beating others, but about controlling yourself at your own game. Being an intelligent investor means knowing what's out of your control and trying to control the controllable, like brokerage costs, ownership costs, and tax bills.

Insights from Chapters 9-10

#1

After financial experts closely examined mutual fund performance over a fifty-year period, they came up with several conclusions. The higher a fund’s expenses, the lower its returns are, and the more frequently it trades its stocks, the less it’s likely to earn.

#2

Additionally, if a fund shows high volatility, and goes up and down frequently, it likely will remain volatile. And funds that have made high returns in the past are not likely to keep that trend up for long.

#3

The reasons successful funds have a hard time maintaining their success include having too much manageable money with too few choices, the migration of fund managers, and the high cost of trading stocks in large rather than small blocks.

#4

The intelligent investor knows that index funds are the most likely to be winners in the long run. Index funds are backed by some of the biggest names in the investing world, like Warren Buffett.

#5

Your first concern when looking for a fund should be its expenses, followed by its riskiness, past performance, and reputation of the manager.

#6

As an intelligent investor, if you must put someone else in charge of your funds, make sure it is either someone you truly trust to handle your money decently, or someone you know will manage the money in standard, conservative, low-risk ways.

#7

If you are prone to making impulsive decisions that you regret later, having a fund manager could help. A manager would rein in your impulses and warn you when you are making unwise choices. A manager also can advise on your asset allocation and comprehensive financial plans.

Insights from Chapters 11-12

#1

The five factors that should help you decide whether to buy a stock or not are the company’s general long-term prospects, its current dividend rate, its dividend record, its capital structure and financial strength, and its management’s quality.

#2

Look for companies that are hard to compete with or be taken down, possess a strong brand identity and somewhat of a monopoly over the product they sell or service they provide, and have stable, non-volatile revenue streams.

#3

If the company consistently generates more cash than it uses, and the debt is fixed rate, then the business is a good one and it’s generally safe to invest in it.

#4

An intelligent investor is always on the lookout to avoid companies that seem promising but are a disaster waiting to happen. Never rely only on one single year’s earnings to evaluate the efficiency of a company, and always look at long-term earnings.

#5

You should educate yourself about financial reporting if you want to be an intelligent investor. Always read financial reports backwards, because companies have a tendency of hiding anything they don’t want you to know in the back. Make sure to read the footnotes in all financial statements.

#6

As a rule of thumb, seeing the words “capitalized,” “deferred,” and “restructuring” should indicate that you’d better do more investigation into a company’s finances. It doesn’t mean you should stay away from the stock, but rather that you should be more informed.

Insights from Chapters 13-14

#1

Intelligent defensive investors should buy only high-grade bonds, along with a diversified list of leading common stocks. They need to make sure that the stock price is not unreasonably high, after having judged it by applicable standards.

#2

To set up the diversified list, there are two choices of portfolio approaches: the DJIA-type portfolio, and the quantitatively tested portfolio.

#3

A DJIA-type portfolio, where DJIA stands for Dow Jones Industrial Average, includes both some favored growth companies, whose shares sell at especially high multipliers, as well as some less popular and less expensive enterprises.

#4

A quantitatively tested portfolio is one to which you apply a set of standards to each purchase that would guarantee a certain threshold of quality, as well as earnings per dollar.

#5

As a rule of thumb when doing quantitative testing, the company you invest in should generate no less than $100 million of annual sales for an industrial company, and no less than $50 million of total assets for a public utility.

#6

Industrial companies should have a two-to-one ratio of asset to liability, which means current assets should be at least twice current liabilities. Other quality factors include earning stability and uninterrupted dividend payments to shareholders for at least the past 20 years, preferably with earnings growth per year.

#7

Remember that these are recommendations for defensive investors. The goal is to eliminate as many options as possible and leave the safest choices, but it doesn’t mean everyone needs to be defensive in their approach.

Insights from Chapters 15-18

#1

One method of stock selection for the intelligent investor is to research the daily list of stocks currently trading at 52-week lows. These are like underdog stocks that are the most likely to provide high returns, once the perceptions of them change.

#2

There are two things investing professionals have in common: first, they put extreme thought and caution into not only what they do, but also the approach they take to do it. Second, they have high discipline, and do not let the whims of the market influence or sway their approach.

#3

Convertible bonds and stock-option warrants are defined as long-term rights to purchase common shares, at stipulated prices.

#4

Convertible bonds are more like stocks than bonds, and are still shrouded with obscurity, so they are not recommended.

#5

Nearly every single stock has a point in its life where it’s a bargain, and a point where it’s expensive. An intelligent investor knows this and takes advantage of it.

#6

Market panic often prices stocks and shares based on feeling or intuition alone and not on real value after analysis.

#7

While intelligent investors know when not to fall for a craze and rush-purchase a popular stock, they also know when the market is undervaluing good or great companies, and take advantage of that to purchase the stocks while they’re low.

Insights from Chapters 19-20

#1

An intelligent investor looking to become an intelligent owner of a company should consider whether the management is reasonably efficient, and whether the interests of the average shareholder are getting adequate recognition.

#2

If a business has good growth, it should be safe to invest in it even if it has lower payout for investors. The idea is that down the line the payouts will grow too. Still, approach these cases with caution.

#3

Statistical evidence suggests that low current dividends of a company indicate that future corporate earnings will be low too, so don’t buy into promises that things will eventually pick up because they often don’t.

#4

Never get caught up in the numbers and forget common sense or obvious warning signs.

#5

An intelligent investor is always wary of the common company practice of buying back stock at high prices to offset the dilution that occurs when employees start exercising their stock options. This often causes stock value to drop.

#6

The margin of safety is the secret of intelligent investment. It is always dependent on the price paid for the stock.

#7

It has become clear over decades of observation that the main way for investors to lose money is by hastily investing when a company has favorable business conditions, without researching whether these conditions are sustainable or built on a stable basis.

#8

The companion of the margin of safety is diversification. The less your investment is focused on a single or a few stocks, the less chance it has of dramatically losing.

#9

At the end of the day, when you apply your investment knowledge and venture in with a set, reasonable amount, you can guarantee your wealth will never suddenly disappear.

#10

Always calibrate your confidence and reasonably prepare yourself for regrets by asking yourself questions like “How likely am I to be right? What will be the consequences of me being wrong? What’s my past record with similar decisions? Am I putting too much at risk?”

#11

Remember, you will most likely make a mistake at some point. Do not let it destroy you; all you can do is learn from it and become a better, more intelligent investor.

Author’s Style

Benjamin Graham’s style is formal and vividly detailed. The text is heavy on investing-specific jargon, some of which the reader is expected to already know. Every chapter is annotated, contains several figures and data graphs, and is followed by commentary from Wall Street Journal columnist Jason Zweig, who also updated the text where needed. The book opens with a foreword by investing superstar Warren Buffett, and ends with several appendices, endnotes, and an index.

Author’s Perspective

Benjamin Graham (1894-1976) is an iconic figure in the world of investing, and is considered the "father of value investing" by Business Insider . He was an economist and college professor as well as an investor. The Intelligent Investor has seen many reprints since its initial publication in 1949, as its core teachings remain relevant throughout the ever-evolving economic scene.